Lower interest rates, better exchange rate management and a demand push are imperative to cope with the present economic slowdown that has been led by a slump in the manufacturing sector, a top government official said, hinting that the Reserve Bank of India needed to align its monetary policy to push growth as inflation targets are well under control, despite a spike last month.
The remarks assume significance in the backdrop of growth slowing to 5.7% in the first quarter, with the slowdown blamed on the lingering effects of demonetisation and de-stocking by producers ahead of the Goods and Services Tax regime’s roll-out in July.
Industry bodies have indicated that a turnaround is only likely in the second half of this year.
“We are concerned and we will adequately respond,” the official said on Saturday, but remained non-committal about whether there was indeed a stimulus package in the offing for the economy.
“A number of manufacturing sectors have been affected, and you can see the manifestation in sectors such as gems and jewellery, electronics, chemicals, textiles, where imports have increased substantially in the last 2-3 quarters,” the official said, requesting not to be named as possible measures to spur the economy are still under consideration.
“Once the effect of demonetisation and GST wears off, we should expect to see those sectors picking up. But those sectors have also been affected by the appreciation of the currency. So it’s a combination of one-off factors — demonetisation, GST plus the appreciation of the currency,” the official stressed.
RBI intervention
Pointing to the central bank’s heavy interventions in the foreign exchange market over the last three months to prevent excessive appreciation of the rupee, the official said that the real competitiveness of the currency has improved a little bit because the Chinese yuan has also been strengthening against the U.S. dollar.
“But it’s still not enough to offset the losses from the last six to nine months [on the exchange rate front]. I think the response [for reviving the affected sectors] has to be across the board — interest rates, exchange rates, creating more demand,” the official asserted, adding that the silver lining was that worldwide export volumes were beginning to pick up significantly.
“So hopefully, when these one-off effects wear off, that will be a source of demand,” he said. The Centre’s reservations on the monetary policy adopted by the central bank were articulated in the Economic Survey’s second volume released in August, where it was pointed out that the RBI’s inflation projections have been over-estimated by at least one percentage point for six of the 14 previous quarters and actual inflation had been below target for over ten months (till August). The Survey had said there was room for a 50 basis points to 100 basis points cut in policy rates by the RBI.
“We have said what we wanted to say about monetary policy in the Economic Survey,” the official said. “The only thing I would say is inflation had picked up in August (to 3.36%), but all the analysis we had done was based on inflation going up... All our analysis was based on the premise that inflation could be at 4% in the medium term,” he pointed out.